Microchips: from saviours to villains

Nancy Pelosi, the third person in the line of succession to the US presidency, recently visited Taiwan, provoking the wrath of the Chinese giant. The reason is all too clear: it was necessary to make a symbolic gesture to assure American support for Taiwan’s independence from China. Now the Taiwanese possess something more valuable than gold: their microchip factories and the substrates that power them. Meanwhile, once again, the Americans have recognised their mistakes before the Europeans have, and have already allocated 260,000 million in investment aid for factories producing both microchips and substrates. But the investment is coming too late, and the market – despite the recession whose grip is already beginning to tighten – is going to demand more and more chips, fuelling further inflation, which is currently our biggest problem.

By Miguel Ángel Temprano

3 August 2022 Reading time: 2.50 mins

Nancy Pelosi’s visit to Taiwan – as the Democratic leader in Congress and its Speaker, but also the third in line to the Oval Office – has triggered a series of threats and acts of hostility from China towards the US.

Despite what is being said in the press, this act – carried out in this manner, as an explicit expression of support for Taiwan’s sovereignty and the US commitment to supporting its independence – was a necessary step that had been a year in the making. This is the clearest demonstration yet that geopolitics is an integral part of the economy.

“Why is the US undermining Chinese pride by arranging for the leader of Congress to visit Taiwan? The answer is clear: Taiwan is currently a necessary partner for the West.”

In addition to the chaos in which we find ourselves, the world is currently experiencing a crisis stemming from a shortage of high-value microchips, given that these are produced mainly in Taiwan–‘just’ 92 per cent of the global total – and its government is rationing supplies in the hope that the world will take notice and provide the attention and assistance they need in the face of constant and alarming threats of invasion from China.

Prior to the invasion of Ukraine, Russia had been conducting military manoeuvres on land – which are always highly visual and television-friendly – but this is not necessarily the case with naval manoeuvres. So, as a televised show of force this time, the Chinese have come up with yet another daft idea: to deploy a series of tanks

light combat vehicles on a beach packed with sunbathers (Chinese, I imagine), who, in their swimwear – some on the shore and others on the sand – watched them pass by as if they were cows watching a train go by. I imagine they were hoping the soldiers wouldn’t step on their towels or knock over their parasols.

However, to understand the significance of this American ‘protest’, one must understand the importance of microchips and the problem posed by the lack of them, given that it is impossible to manufacture them on a large scale in the short to medium term outside Taiwan.

“The Chinese TV show featuring cars on the beach has been embarrassing, with sunbathers on their guard to make sure the car didn’t run over their towels”

I must apologise in advance to the experts in this field, as I am not one myself, and my account is based on an examination of the issues rather than the technical aspects, which, to be honest, I feel unable to address.

To understand what microchips are, we need to go back to the transistors – not the radios – on the circuit boards that we’ve always seen when taking apart any electronic device in our homes.

Their development has taken place along two parallel, yet distinct, paths: a reduction in size and an increase in processing capacity, whether in terms of computation, memory or any other function. The old transistors were soldered onto a green board which, in turn, had connections to some conductive elements that formed a circuit. Well, now that green board is a

tiny silicon wafers (they make up the majority

(20 nm). And this is where the problem begins.

“The evolution of microchips is spearheading a genuine industrial revolution”

Silicon is the second most abundant chemical element on Earth; in fact, when purified to 98 per cent, it is a chemical element widely used in steel production. However, this level of purity is insufficient for use in the manufacture of this type of wafer, so it is necessary to subject the metallurgical-grade polycrystalline silicon obtained to a complex process in order to produce the semiconductor-grade monocrystalline silicon required for ‘printing’ the microchip’s circuits.

The process of producing semiconductor-grade silicon wafers requires highly complex manufacturing facilities, both because of the technical requirements and the risk that they might literally explode during the wafer manufacturing process.

These wafer fabrication and circuit printing plants are known internationally as FABs and, as we shall see later, are quite rare worldwide.

“There are problems with microchip manufacturing capacity, raw materials and substrates – what more could anyone ask for?”

But the shortage also affects the primary source: silicon. It seems a contradiction that, whilst it is the second most abundant chemical element on the planet after oxygen, the raw material is in short supply, but the fact is that what goes into the FAB’s feedline is not sand but a compound called PCB, which is a processed silicon product that in turn requires facilities that are equally scarce.

42 per cent of the production of substrates and raw materials that supply these FABs comes from Taiwanese companies, and amongst the world’s 25 largest manufacturers, only two are non-Asian. Our indirect dependence is therefore already staggering.

But we come to the next link in the value chain: the FABs, where wafers are not only manufactured but also etched to produce the infamous microchips. The undisputed global leader at present is TSMC, a Taiwanese company that controls 42 per cent of the global market; not only does it hold this staggering market share and control the market, but it also possesses, almost exclusively, the technology to produce the smallest and most powerful chips on the market.

You’d expect a company operating in such a large market with such a significant market share to have a huge number of factories, but no – it only has five, and that’s because building them is so costly, both in terms of money and time.

“More than twelve years ago, Taiwan strategically positioned itself as the world’s leading chip manufacturer, and it is now reaping the rewards.”

TSMC’s CEO has stated that the entire output of its five FABs has been sold through to 2026. They have continued to invest and have two more fabs under construction; he believes that by 2024, if demand were not to grow, they would be able to stabilise the market, but he predicts that this will not be the case because demand is growing exponentially.

Some pseudo-intellectual – the sort who argue that more money should be printed to pay off the debt, or that the inventors of vaccines should share their patents for free – would probably say that they should share their technology; but unfortunately, the world moves forward because of the risks taken by a select few.

As I said earlier, building a FAB requires money, technology and time. The first is not a problem, but the second is not shared, due to market forces, and the third is not available.

In mid-July, the US Senate passed a special bill, with the support of all 50 Democratic senators and 17 Republicans, to allocate a budget – 67 votes in the Senate is almost unheard of – of no less than 260,000 million dollars in aid to set up PCB factories and FABs in the US, thereby reducing dependence on Taiwan in this critical sector.

This investment will pay off, but it will take a very long time. No one in the sector expects to see the first results until the end of 2026, which at the moment seems like an eternity.

“The Senate vote to pass the law on investment in manufacturing facilities is unprecedented in terms of the support it has received from lawmakers”

These microchips are used in practically everything – not just in mobile phones or televisions, but also in cars, aeroplanes and fridges. And they are essential to the development of the real new revolution: 5G.

Until now, mobile phones were designed to connect people in different ways and as quickly as possible. This was achieved with 4G; now technology has taken a giant leap forward and will enable the so-called ‘Internet of Things’, making self-driving cars and all the other innovations we’re seeing possible, thanks to 5G. This is set to cause an exponential surge in demand for microchips in the short term.

As nobody is going to want to halt their demand – that is to say, the car industry needs them to sell cars and the 5G sector needs them for its infrastructure – a collapse is inevitable – or rather, the issue will not be resolved either now or by 2024 – which will bring our economic development to a standstill, having a very negative impact on inflation, which is currently our biggest problem.

The conclusion seems clear: the Americans have sent Nancy Pelosi to allay the fears of Taiwanese experts who recognise that the microchip shortage is a long-term problem with very little prospect of improvement in the short to medium term, meaning that its impact on our inflation is not going to abate.